“An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”
On Friday, December 22, 2017, President Donald Trump signed the massive tax bill. Formerly known as the Tax Cuts and Jobs Act – so-named because it cuts individual, corporate and estate tax rates, and the lower corporate tax rates are said to be a precursor to job creation – the bill went into history as “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” courtesy of a technicality enforced by the Senate parliamentarian.
The final bill is more than 500 pages – even tax and public policy experts probably need megadoses of caffeine to slog through it. The ultimate effect on Americans and the economy remain to be seen. But some effects are clear already.
This guide doesn’t provide an exhaustive list of every change to the tax code, it does include the key elements that will affect the most people. The ultimate impact depends on your personal situation — how many children you have, how much you pay in mortgage interest and state/local taxes, how much you earn from work, and more.
- · You Own a Home - If you live in a high-tax area, you will be especially affected by the new $10,000 limit on how much state and local tax (including property taxes) you can deduct from your federal income taxes (exempted: taxes that are paid or accrued through doing a business or trade). More details below, under "You Itemize and File Schedule A." Your current mortgage-interest deductions won't be affected, but if you move, that will change (see next section). Fewer people will itemize, though, since the standard deduction will increase from $6,350 to $12,000 for individuals and for married couples filing separately, from $9,350 to $18,000 for heads of household, and from $12,700 to $24,000 for married couples filing jointly. Homeowners also won’t be able to deduct the interest on home-equity loans, whether they itemize or not.
- · You're Buying (or Selling) One - Under current law, homeowners can deduct the interest on a mortgage of up to $1,000,000, or $500,000 for married taxpayers filing separately. Now, anyone who takes out a mortgage between December 15, 2017, and December 31, 2025, can only deduct interest on a mortgage of up to $750,000, or $375,000 for married taxpayers filing separately. For buyers in expensive markets, these tax code changes could make home ownership less affordable. For most people, the difference between owning and renting, from a tax standpoint, is now much smaller. Zillow estimates that only about 14% of homeowners, down from 44%, will claim the mortgage interest deduction next year.
- You Itemize and File Schedule A - As already discussed, the standard deduction has increased from $6,350 to $12,000 for individuals and for married couples filing separately, from $9,350 to $18,000 for heads of household, and from $12,700 to $24,000 for married couples filing jointly. This change means many households that used to itemize their deductions using Schedule A will now take the standard deduction instead, simplifying tax preparation for an estimated 30 million Americans, according to USA Today. The Joint Committee on Taxation estimates that 94 percent of taxpayers will claim the standard deduction starting in 2018; about 70 percent claim the standard deduction under current law. Not filing schedule A means less record keeping and less tax-prep time. But it also means charitable contributions will effectively no longer be tax deductible for many taxpayers because they won’t itemize. Taxpayers who continue to itemize need to be aware of changes to many Schedule A items beginning with the 2018 tax year.
- Casualty and Theft Losses. These are no longer tax deductible unless they are related to a loss in a federally declared disaster area – think hurricane, flood and wildfire victims.
- · Medical Expenses. The threshold for deducting medical expenses temporarily goes back to 7.5% from 10%, and that change applies to 2017 taxes, unlike the bill’s other changes, which mostly don’t kick in until 2018. But the change only applies through 2019. After that, the 10% threshold returns. This change particularly helps those with low incomes and high medical expenses. If your adjusted gross income is $50,000, you’ll be able to deduct medical expenses that exceed $3,750. So if you paid $5,000 in medical expenses and you’re itemizing using Schedule A, you’ll be eligible to deduct $1,250 of your $5,000 in medical expenses.
- · State and local taxes. Taxpayers can deduct a maximum of $10,000 from the total of their state and local income taxes or sales taxes, and their property taxes (added together), a measure that might hurt itemizers in high-tax states such as California, New York and New Jersey. The $10,000 cap applies whether you are single or married filing jointly; if you are married filing separately, it drops to $5,000.
- · Eliminated Miscellaneous Deductions. Taxpayers lose the ability to deduct the cost of tax preparation, investment fees, bike commuting ($20/month) unreimbursed job expenses and moving expenses can no longer be itemized.
- · Other items taxpayers can still claim deductions for on Schedule A through the 2017 tax year: personal property taxes, such as vehicle registration taxes; mortgage insurance premiums; and miscellaneous expenses that exceed 2% of adjusted gross income, such as investment interest; unreimbursed employee expenses such as work travel and work-related education; and investment fees and safe deposit box fees if the box holds income-producing items like stocks and bond documents.
- Personal Exemption - That's about to end. For 2017, the exemption amount is $4,050 each for individuals, spouses and dependents, including children. This amount is not subject to any income tax at all. What it does is lower your taxable income. Starting in 2018, that exemption goes away. The exemption’s elimination might actually offset the doubling of the standard deduction for families since deductions and exemptions both reduce your taxable income.
- · You Have Children Under 17 - The child tax credit will increase from $1,000 to $2,000 per child under age 17. It’s also refundable up to $1,400, which means that even if you don’t owe tax because your income is too low, you can still get a partial child tax credit. The bill also makes the tax credit more widely available to the middle and upper class. In 2017, single parents can’t claim the full credit if they earn more than $75,000 and married parents can’t claim it if they earn more than $110,000. Those thresholds are increasing to $200,000 and $400,000 from 2018 through 2025. As for age, current law applies to children under age 17; the tax bill doesn't change the age threshold for the child tax credit.
- · Undocumented immigrant parents. Under current law, undocumented immigrants who file taxes using an individual taxpayer identification number can claim the child tax credit. The new law will require parents to provide the Social Security number for each child they’re claiming the credit for – a move that seems designed to prevent even undocumented immigrants who pay taxes from claiming the credit. In addition, the broader exposure that children’s SSNs will receive makes their numbers more susceptible to identity theft, and people might make more use of stolen SSNs to claim the credit in the first place.
- You Have Children in Private School - 529 plans have been expanded. In addition to using them to fund college expenses, parents may now use $10,000 per year from 529 accounts tax free to pay for K-12 education tuition and related educational materials and tutoring.
- · You Care for Elderly Relatives or Have Kids 17+ - For dependents who don’t qualify for the child tax credit, such as college-aged children and dependent parents, taxpayers can claim a nonrefundable $500 credit, subject to the same income limits as the new child tax credit (explained in the "Children Under 17" section, above). Under current law, taxpayers can claim an exemption for qualifying relatives who meet dependent standards, which include having gross income of less than $4,050 and receiving more than half of their support from you.
- · You Buy Health Insurance Through the Affordable Care Act - the individual health insurance mandate is repealed. This change, which becomes effective in 2019, not 2018, means that from 2019 on, people who don’t buy health insurance will not have to pay a fine to the IRS. This freedom of choice also means that individual insurance premiums could increase by 10%, and 13 million fewer Americans could have coverage, according to the Congressional Budget Office.
- You're the Dependent or Spouse of Someone with a Student Loan - Federal and private student loan debt discharged from death or disability will not be taxed from 2018 through 2025. This change will be a big help to unfortunate families.
- · You Have (or Will Inherit) a Large Estate - The current federal estate-tax exemption thresholds are $5.49 million for individuals and $10.98 million for married couples. If you die with assets worth less than those amounts, you don’t owe any estate tax. From 2018 through 2025, the thresholds double to nearly $11 million for individuals and nearly $22 million for couples. According to Tax Foundation estimates, about 5,500 households will owe estate tax in 2017, and they will owe a total of $19.9 billion after credits. And raising the estate-tax exemption saves the few households affected about $10 billion, or costs the government about $10 billion, depending on how you look at it.
- · The top estate-tax rate remains 40%. The estate tax uses a bracketed system with increasing marginal rates, just like the individual income tax does. It starts at less than 17%, but escalates quickly. Once your taxable estate (the amount beyond the exemption) reaches six figures, you’re already in the 30% bracket.
- · How Will Your Tax Bracket Change? That depends. Tax rates are changing from 2018 through 2025 across the income spectrum. In 2026, the changes will expire and current rates will return, absent further legislation, though the tax brackets will have changed slightly due to inflation. The individual cuts were not made permanent. The reason given: their effect on increasing the budget deficit.
- Federal Individual Income Tax Rates for High-Income Earners, 2017 vs. 2018
- Middle-Income Households - In 2018, according to the Tax Policy Center, the second quintile of income earners will get an average tax cut of a little over 1%. The third quintile will get an average tax cut of about 1.5%. Overall, middle income families can expect to save an average of $900 in taxes. The table below shows how middle-income earners will see their tax brackets change in 2018 through 2025.
- You Own a Pass-Through Business – A pass-through business pays taxes through the individual income tax code rather than through the corporate tax code. Sole proprietorships, S corporations, partnerships and LLCs are all pass-through businesses; C corporations are not. According to the New York Times, nearly 40 million taxpayers in 2014 claimed pass-through income. Under the new tax code, pass-through business owners will be able to deduct 20% of their business income, which will lower their tax liability if they are in a higher individual tax bracket. However, professional-services business owners such as lawyers, doctors and consultants filing as single and earning more than $157,500 or filing jointly and earning more than $315,000 face a phase-out and a cap on their deduction. Other types of businesses that surpass these earnings thresholds will see their deduction limited to the higher of 50% of total wages paid or 25% of total wages paid plus 2.5% of the cost of tangible depreciable property, such as real estate. Independent contractors and small business owners will benefit from the pass-through deduction, as will large businesses that are structured as pass-through entities, such as certain hedge funds, investment firms, manufacturers and real estate companies. Both pass-through and corporate business owners will be able to write off 100% of the cost of capital expenses from 2018 for five years instead of writing them off gradually over several years. (L44) That means it will be less expensive for businesses to make certain investments.
- You Own (or Work for – or Invest in) a Multinational. Tax reform changes the U.S. corporate tax system from a worldwide one to a territorial one. This means U.S. corporations will no longer have to pay U.S. taxes on most future overseas profits. (L44) Under the current system, U.S. corporations pay U.S. taxes on all profits no matter what country they are earned in. The tax bill also changes how repatriated foreign earnings are taxed. When U.S. corporations bring profits held overseas back to the United States, they will pay a tax of 8% on illiquid assets such as factories and equipment, and 15.5% on cash and cash equivalents. The tax is payable over eight years. Both new rates represent substantial drops from the current rate of 35%. In addition, the anti-base-erosion and anti-abuse tax intends to discourage U.S. corporations from shifting profits to lower-tax countries moving forward. Although these cuts will also how much corporate tax is applied to the deficit, they do not expire starting in 2026 as the individual cuts do.
- You Own (or Work for – or Invest in) a Corporation - Corporations, like individuals and estates, pay tax under a bracketed system with increasing marginal rates. In 2017, those rates are as follows:
- Looking at the Future: What's Permanent, What Isn't -All the individual changes to the tax code are temporary, including the 20% deduction for pass-through income. Most changes expire in 2026; a few, like the reduced medical-expense threshold, expire sooner. The corporate tax rate cut, international tax rules and the change to a slower measure of inflation for determining tax brackets are permanent.
- High-Profile Issues the Tax Bill Didn’t Change
- Grad students felt threatened by the possibility that their tuition waivers would be taxed. Didn't happen.
- Teachers also worried about losing their up to $250 deduction for classroom and certain job-related expenses. They didn't.
- The low-income housing tax credit was saved.
- The act failed to reduce the number of tax brackets to 4, which would have simplified the tax code – a major part of Paul Ryan’s original proposal to make taxes so easy that most Americans could file them on a postcard. We still have 7 tax brackets.
- The act also failed to eliminate the individual alternative minimum tax. But it did increase the threshold for paying the AMT so fewer taxpayers will be affected by it.
- The House bill wanted to eliminate medical-expense deductions, but the final bill keeps it and provides a small boost for three years, as noted above in "You Itemize and File Schedule A."
- The earned income tax credit, which gives a tax break to the working poor, was not expanded.
- And, in the end, the expansion of 529 plans to cover K-12 education did not include homeschooling.